SunTrust Sells 93-Year Coke Stake as Crisis Hangover Ebbs

By Laura Marcinek -
Sep 7, 2012

SunTrust Banks Inc. (STI), the lender that
invested in Coca-Cola Co. (KO) in 1919, sold most of that stake for a
$1.2 billion gain to help cover the costs of bad loans and put
other lingering effects of the financial crisis behind the firm.

The transaction will boost third-quarter net income by
about $750 million, or $1.40 a share, the Atlanta-based bank
said yesterday in a statement. Proceeds of the sale will help
the lender set aside $375 million to fund the repurchase of
faulty mortgages and absorb a $250 million pretax charge tied to
the writedown of soured loans.

SunTrust, led by Chief Executive Officer William Rogers, is
cashing in a more than $2 billion Coca-Cola stake that was
valued at $100,000 when a predecessor of the bank aided the
beverage firm with its initial public offering. The crisis that
struck almost a century later spurred the lender to seek ways to
boost capital as losses from bad loans mounted, and the bank is
using the share sale to purge that mess from its balance sheet.

“This is a big leap,” Gerard Cassidy, an RBC Capital
Markets analyst, said in a phone interview. “All of the major
regional banks and money-center banks have been on the road to
recovery, some have moved down that road more quickly than
others. SunTrust was a laggard. This action accelerates the
recovery process.”

SunTrust, the second-best performer this year in the 24-
company KBW Bank Index, advanced 4.8 percent in New York
yesterday and has surged 51 percent this year. The shares added
1.2 percent in extended trading after the announcement.
If the stock continues to climb, the company may have a stronger
currency for making deals and still could be deemed an
acquisition target, Cassidy said.

Original Formula

“Management has no intention of selling at this time, in
our view,” said Cassidy, who rates the shares outperform.

Coca-Cola, which counts billionaire Warren Buffett’s
Berkshire Hathaway Inc. (BRK/A) as its largest shareholder, has climbed
9.1 percent this year and returned 88 percent, including
dividends, since the end of 2008. SunTrust said the sale of Coke
shares will cut net interest income next year by $40 million as
it will no longer benefit from those dividends.

A SunTrust predecessor bank, Trust Company of Georgia, took
stock instead of cash when helping Atlanta-based Coke with its
IPO. The lender kept a copy of the original formula for Coca-
Cola in a vault until December.

‘Shareholder Perspective’

In 2008, SunTrust crafted plans to raise capital through
its stake in Coca-Cola. At the time, neither company’s stock was
“where it wanted to be,” Chief Risk Officer Thomas Freeman
said on the conference call.

“If you go back to that as a premise and say, gosh, we
used that asset to help solidify our capital position at what
was unprecedented times, you actually have to feel OK about it
from a shareholder perspective, the use of that asset,” he
said.

SunTrust, which employed about 28,300 people as of June 30
and operates 1,641 branches, was forced to resubmit its proposal
for managing capital levels after the firm failed part of a
Federal Reserve stress test in March. Last month, the lender
said the Fed didn’t object to a capital plan that excluded
payout increases and share repurchases this year.

The $375 million provision to repurchase faulty mortgages
was prompted by talks with Fannie Mae and Freddie Mac, SunTrust
said in the statement. Total reserves now are expected to cover
remaining demands on loans sold to those so-called government-
sponsored enterprises, the bank said.

‘Improved Relationship’

Fannie Mae and Freddie Mac expanded efforts to get refunds
on soured loans. The biggest U.S. banks have seen costs from
faulty home loans and foreclosures rise to at least $84 billion
since the start of 2007 through the middle of this year, data
compiled by Bloomberg show.

SunTrust Chief Financial Officer Aleem Gillani said the
provision was a result of the firm’s “improved relationship”
with Fannie Mae and Freddie Mac.

“We’re both becoming increasingly comfortable with each
other and sharing more information,” Gillani said on a
conference call yesterday.

PNC Financial Services Group Inc. (PNC), the seventh-biggest U.S.
bank by deposits, said in June it will boost reserves by $350
million to cover demands for refunds on faulty mortgages after
one of the GSEs requested and reviewed a larger number of files.
First Horizon National Corp., based in Memphis, Tennessee, said
that month it took a $272 million pretax charge related to
mortgage putback requests and litigation reserves.

SunTrust expects to book a $1.2 billion gain from the Coca-
Cola stake sale. The bank will shift $3 billion in loans to its
available-for-sale holdings, resulting in the $250 million
pretax charge, the company said. The lender also will sell about
$200 million of affordable housing investments, causing an
additional pretax loss of $100 million. The firm sold 59 million
shares and is contributing 1 million to charity.